Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

It’s hard to stop thinking about the bizarre plan or project by PDVSA to sell stock in one of its units via the Chinese Government’s CITIC Group (China Investment Trust Investment Corporation). With more details known at this time of the agreement between PDVSA and CITIC signed by Chavez right before his departure from Cuba, I believe I have some idea about what this is all about. For background, you can read the few press notes on this here and here, (Note none are in Venezuela’s press) or the contributions by bloggers here, here and here.

Recapping, PDVSA signed an agreement to sell 10% of it’s Petropiar unit to China’s CITIC. Nothing strange there, PDVSA can, according to the Hydrocarbons Law, sell up to 40% of these joint projects to anyone. In the case of Petropiar, formerly known as Hamaca or Petrolera Ameriven, PDVSA holds (or held) 70% and Chevron holds 30%. (In the original project, ConocoPhllips held 40%, but refused to sell its stake to the Government and it was expropriated). Petropiar uses very heavy crude (8 to 9 API) which through mixing with other oil and processing through an upgrader generates much higher quality 26 degree API oil, about 180,000 barrels a day of them.

So, to begin with, press reports suggesting that CITIC Securities, the stock market arm of CITIC will advise PDVSA on how to float Petropiar shares in the Hong Kong Stock Market are, or seem to be, incorrect.According to law, only CITIC or Chevron could do that.

Thus, the first transaction is very clear: PDVSA is selling to CITIC 10% of Petropiar at an unknown price and the Chinese are giving PDVSA cash, which it needs to fund new projects or whatever:

So far, everything is OK, the Chavista Government or PDVSA gets more money from the Chinese. The problem is that the Chinese have no “exit” strategy, to use venture capital parlance. They give money and give money, but they have no way of either realizing the gain, or they may not want to commit ever increasing amounts of money to Venezuela for the heavy oil crude fields. But they do want more oil.

On the other side is PDVSA, that needs ever increasing amounts of money to develop the Heavy Crude Oil fields, but has found resistance from the Chinese in funding the projects. Essentially, the Chinese are willing to fund their 40% share, but expect PDVSA to finance its 60% majority stake in any new project.

Enter the very capitalistic Chinese people at CITIC Securities, who suggest buying a stake in a mature project like Petropiar, which is fully operational, at what I am sure is a good price, and have PDVSA allow CITIC to place part or all of the shares of CITIC in Petropiar in the Hong Kong Stock Exchange. Thus, sometime in the future, CITIC would sell its shares and get money in return. This is what would happen:

What has been accomplished? A number of things. First, CITIC recouped its investment and more than likely made a profit, knowing the Chinese, it will be a nice profit. Thousands of investors will now own the shares.

But more importantly, the market, the much hated by Chavismo capitalistic-Stock Market, will establish a price for a 10% stake of a heavy oil crude project in Venezuela’s Faja Petrolifera.

A couple of notes here. First, note that the upside of the sale goes to the Chinese, not to, for example, to Venezuelan investors. Perverse, no?. Two, for Venezuela this is a no-brainer, PDVSA gives up dividends (investors will have to be paid somehow), but the Venezuelan Government will continue to charge royalties, taxes and windfall taxes on each barrel produced, which is where the big money really is.Three, the Chinese have realized a profit in their investment and can now plow the money back into Venezuela. Simply recirculate it, they can buy 40% of Petroanzoategui (formerly Petrozuata, fully owned by PDVSA) or they could buy 23.3% of Petromonagas (formerly Cerro Negro, where BP has a small stake). Then, they can turn around and sell these in the Hong Kong Stock Exchange.

And they can take their money and their profits or whatever they sell their shares for and plow it back into Venezuelan oil fields.

But more importantly, PDVSA has found a way to raise money for the new projects, which are not producing yet and the Chinese to establish how much they will be worth when producing, a nice way to know your return in investment ahead of the project. After all, a barrel of improved oil from any of these projects is worth roughly the same in all of them. The Chinese get some money back, likely have clauses that the oil from new projects will be shipped exclusively to China and more importantly, they can sell their stakes in the new projects once they are fully functioning too.

And in a virtuous circle, an almost pyramid, as long as people need oil, they can invest the money in ever new projects in Venezuela’s heavy oil fields. The much-hated markets will provide the endless funding, like this, as long as it is profitable:

Over and over again. You can do this as many times as there is a new oil field to develop and there is investor appetite for it. Of course, oil prices and appetite for oil has to stay high too.

Of course, you don’t need the Chinese for all of this. PDVSA could have eliminated the Chinese middle-man and do a typical capitalistic placement directly in the World Stock Exchanges. This is what PDVSA was planning to do, but before Chavez. Thus, it was scrapped. It was against sovereignty, selling the country and all that revolutionary bla, bla, bla.

Except that PDVSA needs the money here and now and the revolution would look bad doing such an obvious about face about from what it claims to believe in. This is exactly what they have criticized and it is better for PDVSA to get the money now and later, after the elections, have the first transaction take place, pseudo-hidden behind the Chinese capitalists.

Which brings me to the last point: None of this is meant to take place until after the election for a number of reasons, the surprise is that they announced it now:

-First, you don’t want this to become a campaign issue, although it does remove the “the opposition wants to privatize PDVSA” accusation from the political debate.

-Second, you don’t want to place the shares in the market before the ExxonMobil and ConocoPhilips arbitration cases in the World Bank’s ICSID arbitration Court are decided. After all, if investor appetite were high for Petropiar, it would place a high price on its shares and could drive the compensation to the two oil companies mentioned much higher.

-Third, if Chavez does win the October election, he would have a few years to implement the above strategy, financing the development of the Faja, which would pump ever increasing amounts of money into the Government’s coffers.

And the virtuous circle of populism would just continue…They just hope…

Note Added: A friend notes that while PDVSA exercized an obligatory 60% majority on the projects when it forced control in 2007, the law says PDVSA only needs to have 50% of each Joint Venture. This implies PDVSA could sell an additional 10% of each of all the projects, a nice piece of change to add to the pot!!!

Everything nice, however, the constitution and the LOH do not allow investors to register oil reserves into their balance sheet; it does not really matter if it is HK or WS. It is expected that the market for these stocks does not shine too much. If Chavez wants big money, assuming he stays in power for the rest of his life, he has to reform, constitution and LOH. Do he will move in such direction? Yes he will do it, revolutions, we have enough proofs, money matters a lot!!

Actually: spoken Chinese is not that difficult. It is written Chinese that is awfully hard, but then most of our compatriots don’t read anything.
But I wonder what they will do when they learn to say “give me money, give me bread, give me water” and the Chinese say in classical Chinese: fuck off, we have all your oil already.
(excuse my Chinese)

Well: all they want is our oil, our gold, our land and Venezuelan women, as young, poor male Chinese have such a hard time in China now, so they won’t have much time to teach Venezuelans how to say “sin chanchullo” in real Chinese.

On language difficulty, obviously, everything is relative. It depends on one’s native tongue, among other things. The good thing for Spanish speakers is that you don’t have the long versus short vowels, most vowels don’t have these tricky things about how open or close or tight they are and you have less consonant clusters. Tones are first a challenge, but if you have a hang for music, you will knack them. The trick is first to work right away with very short sentences, ideally 6 to 8 syllable sentences, to get a knack for tone sequence.
For Spanish speakers I think the hardest sounds are qi as opposed to chi and perhaps for some ci and zi.
Morphosyntax is very easy: it is a very analytical system and even when you have dependent clauses you don’t have very intricate constructions but use what linguists call verb serialization: Chinese come take oil.

There are certain patterns and tricks you can learn for learning the characters, but still no matter how clever you work, it takes a lot of repetition before you can understand the contract by which you have sold out your soul to the Shanghai merchants.

Miguel, your posts are always excellent. I rarely comment but this post raises a number of questions for me.

1. If understand correctly, the main thing about this new “instrument” is that it allows Venezuela to raise USD from oil projects from more people than just the Chinese, i.e., Venezuela can now tap the stock market (worldwide investors) which increases its financing availability. If I’m getting this right, does this mean that Venezuela can find a complement to issuing bonds in order to gain USD to sustain the exchange rate? Naturally it’s not a great complement (as Venezuela isn’t issuing the shares, so it still depends on the Chinese, i.e., CITIC could be seen as Venezuela’s investment-banker). But in the future we may see “securitization” of oil fields in order to sustain the SITME. Investment bankers should be fascinated!
2. One thing I’m missing is why this seems to be new. Can any company float shares in a unit that is a joint venture with PDVSA? I.e., could Chevron float the entirety of its 30% ownership of Petropiar or does it need PDVSA’s authorization to do this?

Federico: On 1) They could do that, but this seems to be more of a way to finance the increase in production. Of course, it all comes out of the same pot globally, but I dont think the intenet is SITME, is obtaining financing for the Faja so that PDVSA can produce more. 2) I dont think the contracts allow the floating of shares without permission. Of course, in the original contracts the foreign companies had control, so they would not want to reduce their stake. In fact, in the Cerro Negro contract, if my memory serves me right, PDVSA could sell its stake, but not the control group, without permission.

Securitization of oil (read please oil fields) it is only possible if oil reserves acs as collateral. But that can not be done yet, Chavez must reform the constitution and the LOH….What about is your bet ?….Do you think he will do it ?. I think he will…..money matters, it is a big deal.

Venezuela does not have an unlimited line of credit, and China has pumped too much money into chavez’s pockets with no return. The loans intended to advance projects were squandered. I would question whether this “sale” actually generates any new capital for PDVSA, or is China just calling in a marker?

“And in a virtuous circle, an almost pyramid, as long as people need oil, they can invest the money in ever new projects in Venezuela’s heavy oil fields. The much-hated markets will provide the endless funding, like this, as long as it is profitable”

Note- you said “they can invest the money in ever new projects in Venezuela’s heavy oil fields”-but, that is not what Chavez will do. He will spend the money willy-nilly
just like he has already done.
Another trick by Chavez to rip off the capitalists and he is signing away, giving away
the house..

I think everyone has missed a really important point here: At what price was the “10% sale” made to Citic? The price would be crucial in determining the amount owed to Conoco Philips at the ongoing court case in ICSID. Right? If Chavez ‘stole’ 40% ownership of Petropiar from Conoca, and he just sold 10% to the Chinese, wouldn’t the judges at ICSID love to know what the price was? Am I right here? Isn’t this logical?

OMG! Just imagine if it were! Why couldn’t the ICSID judges ‘demand’ the disclosure of the stated price? What if it were 3 or 4 billion, then multiply that by 4 for Conoco’s share. Staggering numbers….

There’s some schlub working at his desk at PDVSA and he/she ‘accidentally’ comes across the document which states the real price at which 10% of Petrobriar was sold to CITIC. With document in hand, and a quick phone call to the attorney’s over at Conoco, would net our hero,….er, how much would you guess….?

[…] Octavio posts, Why I Think PDVSA Plans To Sell Stock In One Heavy Crude Oil Project Via The Chinese Governement A couple of notes here. First, note that the upside of the sale goes to the Chinese, not to, for […]

It’s not clear to me why you would think PDVSA’s JV’s pay dividends to their shareholders. PDVSA may be milking these companies for all they’re worth. And this likely means their oil sales are cashed in but the money somehow flows back to PDVSA’s bank accounts. They don”t pay dividends, and that keeps all the money at home. If I were those Hong Kong Chinese I would ask for some kind of paperwork showing the money will be paid. I doubt PDVSA would give such guarantees. They can’t even sell their bonds at a decent interest rate as it is.

I just don’t get it-why do people think this is agood idea? Good business and should be replicated.
For example-now PDVSA is going to go from one area to another throughout the Orinoco Faja and “give” even more to China to allow China to develop even more-and you think PDVSA will become richer and so will Venezuela? No way, I know I heard a who! Have you ever heard of the Law of Diminishing Returns?
An example- the refinery supposed to be joint venture with Brazil-well what happened to PDVSA?( And, why did PDVSA ever entertain a joint venture with Brazil anyway?)
And, Chavez demanded adventures in Ecuador, Nicaragua, Cuba,,,etc.
Everybody knows PDVSA has not been run like an honest fair company since Chavez took control of it. The books are cooked, Ramirez is a big liar, and on and on-so why does anyone believe any of this is “good business” with China ?
I don’t and I hope you have a talk with yourself and tell me clearly -do you think this is “good business” -why or why not?

-The Devil wrote about the Chinese-“And they can take their money and their profits or whatever they sell their shares for and plow it back into Venezuelan oil fields.”
This is what the Chinese certainly will do.
You see- a machine-a mechanism for the Chinese to eventually gobble up all of
the oil business from PDVSA.

The Chinese are fools to trust this particular lying,cheating, abrogating Government (as would any JV investors, if the stock ever gets issued). Also, the U.S. geo-politically will not sit around forever as its strategic Hemispheric reserves/imports (now at a 1992 low of 800+ bpd) go much farther down the drain. Chavez still exists because he has backed away each time he got too close to the abyss. But he is at it now, and will probably be “saved” by divine intervention.

I would suggest anyone who thinks that this particularly financial move, ordered by government, go and read the fine print of the Constitution 2000 and LOH, they conforms a very good straitjacket to PDVSA to do any good business based on profit incentives. I think that some are just thinking like regular traders selling anything that moves in the earth.

[…] Octavio posts, Why I Think PDVSA Plans To Sell Stock In One Heavy Crude Oil Project Via The Chinese Governement A couple of notes here. First, note that the upside of the sale goes to the Chinese, not to, […]

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